China’s standard setting organization (Standardization Administration of China, or SAC) posted a draft new patent regulation (“Regulations for the Administration of the Formulation and Revision of Patent-Involving National Standards (Interim) (Exposure Draft)”. Industry concerns, mostly from outside China have been expressed. Especially the provisions of the articles 8, 9 and 13 cause concerns that companies have to licence their IP below market value.

Article 8 states that a company which participates in a standardisation process and fails to obey the disclosure requirements on essential patents is deemed to have granted a royalty-free licence. Article 13 provides that for patents reading on a compulsory national standard the patentee shall grant a licence on a royalty free basis, or the national administration department of standardisation shall request the related departments to consult with the patentee about the disposal of the patent. Additionally, article 9 offers a choice of licensing commitments for essential IP owners in national standards, almost bringing the patentee between the devil and the deep blue sea: either to grant a royalty-free licence or to offer a licence on a reasonable and non-discriminatory basis at a price significantly lower than the normal royalties.

At first sight, these IPR rules look quite radical. Especially the royalty free licensing  regulation of Article 8 could seriously harm multinational companies which (to quote Sven Wehser, head of corporate intellectual property, standardisation and environmental affairs for Siemens in China) have no oversight about their blown up patent stocks and therefore are quite likely to fail the disclosure of their own standard relevant IP.

Is it really so bad? If we look at well known policies of “our” (Western)  SSOs (i.e. ETSI, ANSI, OASIS, etc.) then it is readily admitted that China’s draft rules are not far from those existing SSO’s have in place and not as abysmal as they look.

Firstly, the disclosure requirement in Article 8 is a common means to enable the technical committees of any SSO to come to a fully informed decision about the particular technical specification and the estimated licensing costs involved. What’s new is that for the first time there is a real incentive to disclose all relevant IP: the threat of licensing on a compulsory royalty free basis.  Actually, not quite as new, as we can find a similar text in the VITA Patent Policy, e.g. article 10.4. Up to now there has not been any possibility for the SSOs to assert the disclosure requirements An incentive to do so might therefore be really useful to avert SSO members from holding-up other members. This is especially true since there is no antitrust remedy any more against opportunistic behaviour like patent ambushing or patent stacking.

Secondly, Article 9 of the Chinese draft could provide effective means to restrain the over-declaration of essential IPRs which regularly occurs in common ex-ante disclosure regimes. If any IPR declared to be essential in a given standard must be licensed at a significant lower royalty rate than the normal rate, the IPR owner will think twice about which patent to declare really relevant to the standard.  Over-declaration of “essential” patents is not just a theoretical problem: look at the ETSI IPR Database, where there are thousands of patents declared to be “essential” in mobile communication standards GSM and UMTS/WCDMA.

And last but not least, there is also a chance to disentangle the patent thicket that was woven by inventing companies who often grow their patent portfolio by just splitting their applications in order to generate a higher numeric impact of their portfolio on a standard. On that score, there is no need to feel sympathy for companies who cannot identify standard essential patents ex-ante a standardisation process (they commonly will identify ex-post). This is not a problem that has to be solved at the expense of an error-free and reliable standardisation process. Who keeps his portfolio tidy, will get along even with the Chinese approach.

Stephan Dorn